CC-BY-SA-2.0, FlickrFoto: Dave Haygarth. Perspectivas Multi-Activos: cuatro temas de inversión en renta variable para 2014
Philip Saunders, portfolio manager across the Investec Managed Solutions Range, gives four equity themes for 2014
1) Continue to avoid the mega-cap dinosaurs
Market indices around the world are dominated by companies that have seen better days. They look cheap and offer tempting dividend yields but often face serious strategic challenges. Some will prosper and some rejuvenate themselves but most are likely to continue to languish. Small caps, mid-caps and the smaller large caps are likely to go on out-performing. We prefer quality growth stocks, especially in the cyclical sectors, well-judged recovery stocks and small & mid cap stocks around the world. What does this mean for investors? In our view this is positive for actively managed equity funds that are prepared to diverge significantly from the weightings of the major market indices.
2) Increase exposure to emerging market equities and debt on weakness
Emerging markets have been disappointing in 2013 with slower growth and weakening currencies leading to sustained downgrades to forecasts of corporate earnings growth. This in turn has undermined equity valuations. Valuations are now attractive in both absolute terms and relative to developed markets but earnings forecasts continue to be reduced. Bond yields have backed up, partly in tandem with developed market yields, partly due to domestic problems. Some currencies have fallen to attractive levels. An emerging markets crisis, marked by currency collapses, capital flight, much higher interest rates and a recession, is highly unlikely but markets could continue to be dull in the short term. Nevertheless, a strategy of building long term equity exposure during the year is likely to be well-rewarded while further currency weakness could provide an attractive long term opportunity to invest in emerging markets. What does this mean for investors? In our view this is an opportunity to add exposure to emerging market equities and debt into weakness – but be prepared to be patient
3) Quality and ‘contrarian’ stocks should continue to out-perform
Many investors in 2013 made the mistake of assuming that ‘quality’ was synonymous with large-cap defensive sectors. Quality implies consistent business strategies, durable market opportunity, long term growth, well-managed finances and high returns on invested capital. These characteristics are to be found in all sectors, both cyclical and non-cyclical. Typically, quality stocks are not cheap but reassuringly expensive; nevertheless sustained long term growth ensures attractive investor returns. ‘Contrarian’ investing in out-of-favour stocks and sectors can also be highly rewarding but the investment world is full of value traps; stocks that appear cheap and pay generous dividends but whose businesses are in long-term decline.
Turn-around stocks are cheap because they are high risk but value realisation depends on business turn-around if investors are to regain confidence. The world is full of value investors but there are many fewer prepared to pay up for quality or with the courage to identify and back companies with real turn-around potential. What does this mean for investors? In our view, investors should be wary of lowly valued stocks with a high yield which are often cheap for a reason. Paying up for quality and buying true contrarian stocks should continue to be rewarded.
4) Resource equities are about value added, not commodity prices
Commodity prices continue to trade sideways, the performance of the energy sector has improved but mining shares, especially precious metal miners, have languished. The problem for energy companies has been replacing reserves at reasonable cost but for miners it has been scaling back over-ambitious expansion plans.
Reducing costs, improving license terms and returning cash to investors have been key across both sectors. Investors continue to shun mining stocks, despite compelling cashflow valuations. They favour integrated majors, many of which are strategically challenged, rather than the growth companies. This creates great opportunities for active stock-picking. What does this mean for investors? We think the outlook for the resource sector is better than implied by current investor pessimism, especially given the opportunity for adding value through stock selection.
Wikimedia CommonsWilliam Finnegan from MFS. The Family Wealth Conversation
William Finnegan, Senior Managing Director of Global Retail Marketing at MFS highlights the challenges investors face when their inheritance gets passed on to their heirs. He provides solutions to this challenge to make this transition a smoother process.
Private equity firms often get a bad rap in the popular media — picture Gordon Gekko in the 1980s movie Wall Street and, more recently, negative characterizations during the last presidential election — but new research by Stanford faculty member Shai Bernstein should dispel some of the myths about this class of investments.
“The public debate about private equity often lacks data upon which to base its arguments,” says Bernstein, who is an assistant professor of finance at Stanford Graduate School of Business. “We wanted to take an in-depth look at the operations of these privately held firms, which are, more often than not, hidden from the public eye.”
After a rigorous analysis of private equity (PE) buyouts in the restaurant industry in Florida, which looked at 103 separate deals from 2002 to 2012 and 3,700 restaurant locations, Bernstein and Harvard Business School faculty member Albert Sheen found strong evidence that private equity buyouts actually improved management practices and operations, as well as decreased prices, all with a minimal impact on employment.
While the study focuses on a single industry and geography, Bernstein stipulates that the findings are indicative of the broader value created by PE buyouts. As he explains, the restaurant industry has much in common with other sectors that attract private equity firms — they have tangible assets, relatively simple operations, and predictable cash flows. “We believe we can draw broader conclusions from these deals,” he says, although noting that some caution should be used in making generalizations.
The researchers decided to focus their efforts on restaurants because of the industry’s pervasive practice of dual ownership, in which a parent company directly owns and manages some locations and others are franchised. In general, a parent company has much less control over franchisees than locations that are directly owned. According to Bernstein, this provided a uniquely controlled experiment about the value added by PE firms, allowing the researchers to compare the effect of private equity ownership on direct-owned versus franchised locations.
Wikimedia CommonsPhoto: Rosana Prada. Azimut and Futurainvest Sign a Joint Venture To Provide Financial Advisory Services in Brazil
Azimut, Italy’s leading independent asset manager, and FuturaInvest, have signed an investment and shareholders agreement to set up a partnership to provide financial advisory services in the Brazilian market.
FuturaInvest, founded by 6 partners with proven experience in the financial industry with an average tenure of 12 years and a strong track record, counts 35 people and 11 offices around Brazil, providing advisory and asset allocation services via funds selection, financial education, and asset management services through funds of funds and managed accounts to around 2,500 clients.
Subject to the satisfaction of certain conditions precedent, the transaction will entail the acquisition, through AZ Brasil, of a 50% stake in three entities: (i) a financial advisory company, (ii) an asset management company (dedicated to funds of funds and managed accounts) and, (iii) subject to the approval of the Banco Central do Brasil countersigned by the President of Brazil, in FuturaInvest DTVM (Distribuidora de Titulos de Valores Mobiliarios). FuturaInvest DTVM is a regulated financial institution authorized to distribute financial products to local investors (operative since September 2013).
The overall transaction value is around $5.3 millon (R$ 12.5 million) mainly paid via a capital increase, which will finance the growth envisaged in the business plan. Furthermore, the agreement contemplates the possibility of a maximum adjustment to the subscription price in connection with the business development over the first three years of operations. As at 30th November 2013 FuturaInvest has around $97 million.
Azimut and FuturaInvest management share the same medium-long term commitment and will cooperate to grow the existing business also by hiring new financial advisors, opening new offices to extend the country’s coverage and increasing the funds of funds product offering.
Myths about the innate differences between men and women when it comes to investing behavior and performance are debunked in a new research report publishedby the Merrill Lynch Wealth Management Institute. A study of 11,500 investors found that while men and women differ in their approach to investment decision-making, gender is less a determinant of investing success than other social, demographic and circumstantial factors.
The Merrill Lynch report, “Women and Investing: A Behavioral Finance Perspective,” suggests that the basis of previous research, which focuses on investing behavior of men versus women, has relied on stereotypes that are limiting in scope. The goal for researchers and advisors is to move away from gender comparisons and instead focus on women’s varied and unique perspectives.
Numerous studies have found that compared to men, women are more averse to investment risk, less engaged in investment decision-making, trade less often and establish investment goals that put the needs of family and community ahead of personal needs.
Merrill Lynch analyzed the behavior and preferences of women investors through a wider lens of social and demographic factors, and found that men and women are far more alike than many people have thought.
Key findings of this research include:
Eighty-five percent of women agree that risk-taking is beneficial, and 81 percent of women feel they can adapt to changing market conditions and investment outcomes.
Men and women who have a similar level of financial knowledge share similar risk behavior. The greatest differentiating factor among investors is their perceived financial knowledge, and women are more likely than men to say they have lower levels of financial knowledge. More than half (55 percent) of women, but only 27 percent of men, agree they know less than the average investor about financial markets and investing.
One-half (50 percent) of women and 55 percent of men want to be personally engaged in making investment decisions.
Approximately one-half of women (51 percent) are concerned they might not reach a key investment goal: having enough money for the rest of their lives. While 58 percent of women say their focus on investing is to meet the needs of their family, more than 40 percent said they do not feel they should put financial support for other family members ahead of their own goals.
“Our research reinforces the importance of concentrating on the unique, personal goals of each investor. Doing so can identify a deeper understanding of the individual’s concerns and priorities which may better align investments to achieve the outcomes the investor desires,” said Michael Liersch, head of Behavioral Finance for Merrill Lynch Wealth Management. “We believe we need to change the dialogue with both men and women, to discuss what really matters to them and what they want their investments to achieve.”
The Merrill Lynch report provides three key action steps action steps for advisors to better understand the unique perspective of men and women clients:
Engage both men and women in dialogue about the investment process. Identifying the right level of engagement can be useful in gaining experience and confidence with investing and managing investments toward desired outcomes.
Make investing personally meaningful. Articulating specific, personally meaningful goals – such as meeting lifestyle needs or leaving money to family members – can help investors develop the right investment strategy.
Structure communication with key decision makers. Identifying various perspectives on investment can help joint decision makers come to the right set of investment-related actions.
A copy of the Merrill Lynch paper “Women and Investing: A Behavioral Finance Perspective” is available here.
Sovereign creditworthiness in Latin America is expected to remain broadly stable in 2014, although some negative bias can be observed in the region’s ratings, with six sovereigns on Negative and none on Positive Outlook, said Fitch Ratings in its 2014 Latin American Sovereign Outlook Report.
“Regional GDP growth is expected to recover moderately to 3.1% in 2014 from an estimated 2.6% in 2013, led primarily by a rebound in Mexico,” said Shelly Shetty, Head of Fitch’s Latin America Sovereign Group. “However, weaker growth in China, softer terms of trade, tighter financial conditions and lagging productivity improvements will constrain growth rates to levels below those seen in the past.”
“Potential external shocks continue to represent the region’s main downside risks, though strong international reserves, combined with flexible exchange rate regimes and steady foreign direct investment should mitigate these risks,” added Shetty.
Growth rates are expected to vary significantly throughout the region. Brazil, Argentina, El Salvador, Jamaica and Venezuela are anticipated to underperform the regional average. Investment-grade Andean countries as well as Bolivia and Paraguay are expected to record above-average growth rates in 2014. Panama, while decelerating, should be the fastest-growing economy in the region.
Below-potential economic growth, easing of commodity price pressures and credible monetary regimes should lead inflation to remain well contained in most countries. On the other hand, moderate growth rates and less favorable terms of trade, combined with continued spending pressures and a busy election cycle could pressure fiscal accounts in some countries. Chile and Peru have the maximum fiscal buffers and among the lowest debt burdens in the region which places them in the best position to implement fiscal stimulus, if needed.
Despite a heavy election schedule for 2014, a significant departure from current policies is unlikely. As a result, elections should be largely credit-neutral, although they could detract from progress on competitiveness-boosting reforms.
Fitch’s special report 2014 Outlook: Latin American Sovereigns – Stable Credit Outlook with Negative Bias is available here.
The business of hedge funds is caught between rising costs and falling management fees, holding little profit for managers who don’t perform. That’s one key finding from the second annual global survey of the economics of hedge funds in the just-released Citi Prime Finance 2013 Business Expense Benchmark Survey.
“Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
According to the survey, the traditional “2 and 20” model of investment manager compensation – 2% management fee and 20% of the profits — has declined to fee levels as low as 1.58% of assets under management for all but the largest managers. As a result, hedge fund managers, unlike their counterparts in traditional, long-only funds, barely break even simply collecting fees. For example, after paying expenses, funds with $500 million in AUM realize operating margins of 69 basis points, rising to 82 basis points for a manager overseeing $900 million, survey data show.
“Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed,” said Alan Pace, Global Head of Prime Brokerage and Client Experience. “And while it’s clear that there is little room for additional downward pressure on management fees, at current average fee levels, investor-manager interests are well aligned – both parties are focused on performance.”
“Our latest survey takes a deep dive into the business challenges of running a hedge fund,” said Sandy Kaul, Global Head of Business Advisory Services for Citi Prime Finance. “Today, a hedge fund needs at least $300 million in assets just to break even. The survey also uncovers dramatic regional differences in business and regulatory expenses.”
In this latest survey, Citi Prime Finance surveyed 124 hedge fund firms in North America, Europe and Asia representing $465 billion, more than 18% of total industry assets. Select findings of the new survey:
Expenses, Fees & Margins
“Emerging” hedge funds — those with assets of less than $1 billion — struggle to cover expenses based solely on management fee collections and do not realize comfortable operating margins.
Pressure to offer founders’ share classes or accept seed capital to launch with sufficient AUM has helped push management fees down from the industry standard “2.0%” benchmark. The Citi survey shows average fees for managers with less than $1.0 billion AUM ranging from 1.58%-1.63%.
“Institutional” size hedge funds, with assets between $1 billion to $10 billion, begin to realize higher operating margins as they surpass $1.5 billion and can see appreciable profits as they approach and move beyond the $5.0 billion threshold.
Average management fees for institutional size managers are well below the historical 2.0% level, ranging from 1.58% to highs of only 1.76% for the largest firms in this band.
The largest “franchise” firms, those with more than $10 billion in total assets, become more profitable due to a broadening set of product offerings that expand beyond hedge funds.
On average, management fees for franchise size firms were 1.53%. For the largest firms, operating margins based solely on management fees were slightly above the 1.0% level noted for institutional managers, rising to 1.2%.
This illustrates that adding lower-fee products actually helps expand operating margins.
Regional Differences
The majority of European hedge funds responding to the survey had higher management company expenses than similarly sized U.S. funds. Across several different firm sizes, European management company expenses were at least 20% percent higher than at U.S. firms.
Marketing was the single largest category of expense variance between the U.S. and Europe. For smaller hedge funds with between $100 million and $500 million, European marketing expenses were 150% to 200% higher than in the U.S., due mostly to compensation differentials. European funds surveyed hired more senior marketing personnel early in their development cycle.
Survey respondents from Asia were confined to lower AUM thresholds — $100 million, $500 million and $1.5 billion. At each of these levels, average management company expenses were lower than in both the U.S. and Europe.
$100 million Asia-Pacific hedge funds had average management company expenses 20% lower than the mean costs noted in the U.S. and Europe for similarly sized firms. This differential expanded at $500 million AUM with APAC funds registering expenses 42% below the mean and staying quite discounted at 39% under the mean for firms at $1.5 billion AUM.
Impact of Regulation
Total compliance spend by firms with $100 million AUM is 18 basis points — half of which covers internal compensation for compliance related personnel and the other half of which relates to third-party outsourcing and software charges.
More institutional size hedge funds, from $500 million to $10 billion, spend between 3-4 basis points on compliance, with at least 70% of these costs going toward compensation for internal headcount.
Franchise firms spend about 1 basis point on compliance, but increase their use of software and third-party services as their product mix includes more regulated and long-only offerings.
Regionally, European-based managers had the highest levels of concern about the impact of regulations, citing both SEC/CFTC and AIFMD registration, compliance and reporting as likely to have a severe impact on their organizations and Dodd-Frank/EMIR OTC derivative rules and FATCA likely to have a moderate to significant impact.
Glennmont Partners, one of the largest infrastructure vehicles dedicated to clean energy across Europe, has secured a €50 million investment in its second fund by the European Investment Bank. The investment is the single largest clean energy equity investment made by EIB this year.
Clean energy investment is a key focus for the EIB as it works to support the European Union’s stated policy objective to cut greenhouse-gas emissions across Europe by 20% over the next six years. In recent years the EIB’s annual lending in this sector has increased substantially reaching €3.3bn in 2012. As well as lending, the EIB makes equity investments and provides finance and expertise to projects across Europe. The EIB has a rigorous review process for all the projects that it chooses to invest in including considering their financial, technical and social long-term performance.
Commenting on the EIB investment, Joost Bergsma, CEO of Glennmont, said: “We are delighted that the EIB has chosen to invest in our second fund. It has developed a first class reputation for its work in clean energy and this investment further demonstrates that our independent, specialist approach is attractive to top-level investors. We share a common goal with the EIB to promote sustainable and secure sources of energy for the UK while also delivering consistent yield and long-term capital appreciation for investors.”
“Glennmont has an established track record and proven readiness to support renewable energy projects across Europe. The European Investment Bank is pleased to back projects that tackle a changing climate.” said Jonathan Taylor, European Investment Bank Vice President responsible for environment and climate lending.
The EIB’s investment will be directly injected into Glennmont’s second clean energy infrastructure fund which now has commitments of €250 million from both new and existing investors from its first fund.
Martine Menko, Investment Officer at the Dutch pension fund for the transport sector,. “Nobody is Considering the Risks Associated With the Unsustainable”
Roderick: How does your fund formulate a policy with respect to sustainability?
Martine: The origins of our sustainability policy go back to the much-discussed Zembla broadcast about cluster bombs in March 2007. This made the board aware that we had to take action. In the beginning, it was just exclusion. By 2008, there was a need to do more than simply exclude. In an ideal world you would not want to exclude companies, you would engage with them. At that time we also looked at the role that institutional investors played in the financial crisis from this perspective.
One of the things missing in the run-up to the crisis was the exercise of voting rights at shareholder meetings. If corrective action is never taken at these meetings, it is no surprise that the management starts to behave like an owner. It is a sort of free put option. They enjoy the profits but not the losses.
Roderick: So your attitude was then: you people need to look in the mirror?
“Our industry only considers its fiduciary duty. In other words, achieving the highest possible return at an acceptable risk.”
Martine: That is right. Many funds took the attitude that ‘there is nothing we can do’. But with hindsight, they could have cast their votes. From then on, there was an interesting shift from not voting to voting yes. But it was based on the assumption that management is in command of all the facts. What you are seeing slowly develop now – in any case at the larger funds – is the introduction of individual voting guidelines. Whether they vote themselves or use a proxy adviser, their votes are cast according to their own voting policy. The question now is what the majority will do, including index investors. We formulated phase one of our sustainable investment policy in 2008. We have now moved on to the next stage. This time, the board is more involved. It is a process.
Roderick:So your first step was actually a more defensive reaction to an external event. Now you have moved to a proactive stance.
Martine: That is right. I presented a draft multi-year plan in which one of the goals was to get a reaction from the board and to increase their involvement. That worked.
Roderick: What led the board to take a more active stance?
There is still a perception that sustainability is at the expense of return. Nobody considers the risks associated with the unsustainable.
Martine: Partly due to increased publicity, the awareness grew that SI could play an important role. What I still find to be lacking is any pressure from the participants. It is all quiet on that front. And personally, I also think there should be more pressure from the regulator and the government. The thinking in these quarters is still focusing only on return in my opinion.
The strange thing is that corporates are already dealing with all kinds of rules with regard to sustainability, but our industry only considers its fiduciary duty. In other words, achieving the highest possible return at an acceptable risk. In the past, this was interpreted exclusively in terms of financial return and risk. But the interesting point is that non-financial risks can have huge financial consequences.
Roderick: You are saying that there is still scant attention to the issue from the regulator and the politicians.
Martine: It is very quiet in The Hague and in Amsterdam. Not only that, if you deviate from conventional benchmarks as a result of a pioneering sustainability policy, you have a problem.
Roderick: Then you have to retain higher reserves because you are seen as taking increased risk.
Martine: We are talking about the definition of risk as used by the regulator. Market risk is considered to be a risk, but not a risk that the regulator can influence. Everything that deviates from this is considered to be a risk that can be influenced. This will only change if public opinion changes. The interesting thing about public opinion is that policy is generally seen as very important. But as soon as it gets personal, there is a tendency to make short- sighted and opportunistic choices. There is still a perception that sustainability is at the expense of return. Nobody considers the risks associated with the unsustainable. ‘Do you want to invest sustainably?’ is actually not the right question. The question that should be asked is: ‘Do you want to continue to invest unsustainably?’ It needs to be turned around!
Roderick: Do you find there is resistance to sustainable investing as a result of the fund’s financial position?
Martine: The board is aware that it is potentially important, but there are so many other issues that are more urgent at the moment. It will take time.
Roderick: Lower funding ratios, missed opportunities: these are the issues, I think.
Martine: Absolutely. The smaller company pension funds mostly have very limited support. The correct focus is missing. In many cases, the board has no support and the pension board members have numerous other duties. The day-to-day issues prevail.
We have seen enough examples of a company’s value being affected by non-financial factors in recent years. And the majority of companies are keen to enter into dialogue.
Roderick: Are you also approached by the participants?
Martine: Very rarely. Recently I held a workshop for our pension consultants. They said that they receive questions on this issue perhaps once or twice a year. Awareness of sustainability is not that strong in the Netherlands. As far as I know, there is no discussion of what our society should look like 50 years from now.
Roderick: You would like to see a principled debate on our future direction?
Martine: I have the feeling that society is run in the benefit of the big companies. Shouldn’t this be the other way around? Take the banks, which should serve industry and business. And clients. But the bailout means the reverse is true. And what has changed? Absolutely nothing! But as long as there is no discussion of this in our society, we will not make any progress.
Roderick: What needs to happen to change things?
Martine: I fear that something serious has to happen. The nuclear disaster in Japan is an obvious example. After Fukushima, the debate on nuclear energy was more or less over. People simply rejected it. Our ‘Fukushima’ might be 50% unemployment among young people, as has already happened in Spain. Ultimately there will be a price to pay. But I do not think we will let it get to that point.
Roderick: Despite the lack of interest, how do you communicate with your participants on this subject?
Martine: First of all via the website. But we also have a newsletter and a magazine. The level of interest is really very low. I do not think that this is really related to the make-up of the transport industry. Drivers are just as aware, or unaware, of sustainability as the rest of the Netherlands. There are many sustainable initiatives in the transport sector such as economical driving, reducing C02 and things like Truck-run. Drivers have their hearts in the right place. But they do not see the connection with their pensions.
Roderick: What do you think about the ‘competition’ to raise more assets so that costs can be reduced as far as possible? After all, index investors are now looking for their own benchmark so that they have to pay less. And I wonder whether an index investor would have any interest in investing in an ESG policy, in the implementation of that policy and the reporting of it.
If you squeeze everything to the last drop, do not expect to get quality. You will not find the best meat at the discount store.
Martine: I think the general rule is that you get what you pay for. If you squeeze everything to the last drop, do not expect to get quality. You will not find the best meat at the discount store. I understand the focus on costs, but there is a difference between paying costs for hedge funds, GTAA, and private equity mandates (of 2% fixed fee + 20% performance fee, or 3% fixed fee + 30% performance fee) and whether you pay 4, 5, 6 or 20 basis points for an index mandate.
The point is: if you pay so little for a mandate, the risks will ultimately be much higher than the couple of basis points you have saved. A typical case of penny wise, pound foolish. But do not misunderstand me, of course we have to do what we can regarding costs. Fees can be reduced. Below a critical level, however, this will be at the expense of quality.
Roderick: How do you see the future? What developments do you expect?
Martine: Mostly limitations as regards implementation. The main obstacle in my opinion is managers who are totally skeptical. Then you have the managers who say that they would like to do something, but ultimately do nothing. And of course the regulator, whose focus seems to be increasingly short term. This, in combination with the fascination for index investing, gives cause for concern. If there is to be no statutory framework for sustainable investing, the outlook is not so positive in my opinion.
CC-BY-SA-2.0, FlickrVideo sobre inversiones sostenibles. Toda la verdad sobre las inversiones sostenibles
Have you invested sustainably lately? The odds are you have, even if you don’t know it. In a little over one minute this video posted in YouTube and produced by RobecoSAM, one of the leader asset managers in Sustainability Investing, explains the truth behind Sustainability Investing and how it can work for the triple bottom line: people, planet, and profit. This long-term investing strategy provides hope for the finance industry and the short-termism that plagues it.
Sustainability Investing is often referred to as Socially Responsible Investing (SRI), Responsible Investing, Impact Investing, Ethical Investing, and Green Investing. It is closely linked to Environmental, Social, and Governance (ESG) topics such as corporate governance, energy and water consumption, greenhouse gas emissions, employee turnover, and waste production.
